Financial Institutions push up IT budgets this year

This year has seen a significant increase in IT budget in the trading/brokerage, fund management, hedge funds and the investments and securities services sectors, as securities services firms look to better manage, hedge and mitigate their risk by investing heavily in risk management systems, whereas fund managers are increasing IT spend in their payment systems.

Amit Shah, financial services technology analyst with Datamonitor, who drew attention to this trend in a new report, commented: “The necessity to offer superior technology and connectivity options to customers is driving heavy investment for these segments as competition heats up in the space. Institutions have realised that technology investment is vital for long-term sustainability and maintaining competitive par, thus for technology vendors, opportunities will continue to present themselves in 2007.”

The Datamonitor report, Financial Markets Technology – trends for financial services institutions, forecasts strong uptake of electronic trading in the near future. “At present only a handful of firms are fully utilising the capabilities of electronic trading. However, with upcoming regulations which advocate the need for best execution, there will be strong uptake of electronic trading throughout 2007,” added Shah.

According to the study, two of the key drivers for increased investment in algorithmic trading stems from the need to keep up with competitors and the growing demand from customers. Hedge funds are also using the need for increased revenue and tracking liquidity (which is critical to their business models) as catalysts as well.

In addition, phishing and anti-money laundering initiatives have emerged as key focus areas to satisfy regulatory requirements. “Regulators have become less tolerant and expect firms operating within their respective jurisdictions to have appropriate and adequate risk measures and controls in place. As such, 38% of all respondents in the study cite security measures as of paramount importance. This likely to continue well into 2007.”

The study reveals that a large number of institutions would not consider outsourcing all of the IT infrastructure areas, however, some firms continue to outsource many elements of their IT infrastructure and this trend is set to continue in 2007. Shah says, “this is especially true within the hedge fund sector as many hedge funds do not have the resources or capabilities to maintain an IT department / function in-house. Furthermore, this opens up a lucrative market for technology vendors to offer ASP risk management solutions targeted at hedge funds.”

Key drivers to outsource back office services remain the same as in 2006, namely, the need for cost reduction as well as improving efficiency of current operations. However, many UK firms in particular have become increasingly cautious about outsourcing to India. Shah cites: “The key reasons for recent customer backlash in the UK centres around data security and confidentiality as well as communication problems between customers and call centre staff.”

02/04/07